Inflation, which is described as a general increase in prices and fall in the purchasing value of money, erodes purchasing power over time. It is a pressing topic at present, particularly for retirees on a fixed income.
COVID-19 has increased inflation risk. Indeed, the price index for gross domestic purchases increased 5.7 percent in the second quarter, much higher than the sub-2% rates we’ve enjoyed over the past few years. Some of the rapid rise reflects recovery from the depths of the pandemic, which drove inflation to abnormally low levels. While the movement of the index was concentrated in a few key categories such as used cars and gasoline, there have been prices rises in many industries. A key question is whether inflation will be permanent or transitory, and if transitory how long we should expect rapid inflation to continue.
COVID-19 impacted both supply and demand for goods and services, and the recovery produces effects on both sides. First, workers have been slow to return to jobs and departed some sectors in search of better opportunities. Companies have offered higher wages to lure workers, in some cases unemployment benefits provide an incentive for workers to delay their return to work and health impacts of the pandemic have made some workers completely unavailable.
Pandemic induced production disruptions have caused supply chain bottlenecks. Finally, unprecedented levels of government spending ($5.4 Trillion), expanded credit ($4.0 Trillion) and pent up consumer demand amplify the impact of supply shortages.
Various factors will mitigate these inflationary effects going forward. Unemployment benefits and many stimulus measures taper off beginning this September which should incent workers to return to work. Supply chain bottlenecks will resolve as prices rise, although the speed of adjustment will vary by market. For instance, the construction lumber market has adjusted quickly while the market for microchips used in many consumer goods may take much longer.